Flipping houses has become quite popular in recent years, thanks to property-flipping TV shows such as Property Brothers that popularize the real estate niche.

A key component to flipping success is capital accessibility. If you are interested in this type of real estate investment but lack enough funds or cannot access a bank loan, fix and flip loans might be your best bet to build your portfolio. Join us, the RTI Bridge Loans team, as we explore the basics of this real estate financing option.

What are Fix and Flip Loans?

Fix, and flip loans are short-term loans used to purchase, renovate, and quickly resell a house to generate a profit within 1-1.5 years. They are a subset of a broader loan category referred to as hard money loans, which are real estate loans secured by real property and provided by private, direct lenders (hard money lenders) and not banks.

The good thing with fix and flip hard money loans is that you can qualify for financing even with an unappealing financial history, unlike typical bank loans that require a good credit score and some form of stable income. They are considered “non-recourse” because the lender’s only recourse if the borrower defaults on the loan is to foreclose the property in question(collateral).

Differences Between Fix and Flip Loans vs. Traditional Home Loans

Typical home loans and fix and flip hard money differs in several ways:

  • Purpose: Fix and flip loans are best suited for short-term real estate investment. Typical home loans help borrowers buy a long-term residence.
  • Funding Speed: Closing a typical bank loan takes 45-60 days, but you can get a fix and flip loan approved and funded within 5-10 days.
  • Term Length: Standard mortgages are usually 15 or 30 years long. Contrarily, fix and flip loans run between 6 months and 24 months. A hard money lender can offer you a 3 to 6-months loan extension if you need additional time to flip the property.
  • Credit Score Requirement: A typical home loan is primarily based on your creditworthiness. The decision to approve or reject a fix and flip loan lean more on the value of the property in question than your credit score.
  • Interest Rates: Fix and flip loans have higher interest rates between 12% and 18%. Typical home loans carry a 2-4% interest rate and a maximum origination fee of 1-2% of the loan amount.

Differences Between Fix and Flip Loans vs. Construction Loans

A construction loan is a short-term, higher-interest loan designed to fund the building of a residential or commercial property. You can also use it to tear down an old building for all-new construction.

Construction loans are typically one year long and cover things such as the cost of land, permits, building materials, and contractor labor. The lender will require you to provide a project timeline, detailed plans, and a realistic budget. They then draft a schedule that aligns with the construction stages. You must make monthly interest payments during the construction period.
Both fix and flip loans and construction hard money loans share similar processes and terms. But you do not need a construction loan if you are doing construction while renovating a real estate property for future sale. A fix and flip loan can fund all the renovation and necessary construction.

Advantages of a Fix and Flip Loan

  • Fast Approval: Because fix and flip hard money loans come from private lenders, they have a quick application process. They do not require numerous documents and endless stages, ensuring you embark on your investment sooner.
  • Covers Multiple Property Types: Hard money loans can cover properties in any condition, whether a short sale, bank-owned, or a foreclosure. Banks have stringent restrictions on the kind of properties they finance.
  • Flexible Terms: Traditional loans are subject to particular structures, processes, and regulations that lenders must follow by the book. If you want more flexibility, consider a flip and fix loan.
  • No Prepayment Penalties: Unlike banks, most hard money lenders in California do not penalize borrowers for paying off their loan before the maturity date.
  • Fewer Risks to Borrowers: Defaulting on a bank loan puts your credit and property at risk. With fix and flip financing, the lender repossesses the collateral (the property in question) when the borrower defaults.

Disadvantages of a Fix and Flip Loan

The most prominent disadvantage of fix and flip hard money loans is that they carry higher interest rates. The lenders do not rely too much on the borrower’s creditworthiness, thus charging higher interest rates to offset the higher risk.

The interest payments can become a heavy burden to the borrower if renovation takes longer than expected or when the completed property stays unsold for too long.

Types of Fix and Flip Financing

Below are a few financing options investors can leverage when flipping houses:

  • Home Equity Line of Credit (HELOC): Based on home equity and secured by your home, HELOC allows you to get funds to flip a real estate property at lower interest rates and up to the credit limit.
  • Cash-out Refinance Loan: With this option, you acquire a new loan against your current home’s equity and use it to pay off the existing mortgage and finance your property flip.
  • Hard Money Loan: This is a great financing option for an experienced house flipper with unfavorable credit or struggling to qualify for a traditional bank loan. Hard money lenders have lenient eligibility requirements but charge higher interests.
  • Crowdfunding: Here, you reach out to a pool of investors to contribute towards your fix and flip project in exchange for high returns on the investment. The fundraising takes place on an online crowdfunding platform.
  • Individual Lenders: You can reach out to an individual to finance your project using their resources. Both parties must put the loan terms in writing to prevent future misunderstandings or conflicts.
  • Investment Property Line of Credit: It is similar to HELOC except that you borrow against your existing rental property’s equity. To qualify for this financing option, you must have excellent credit and a high success rate with real estate investments.

Tips to Get a Fix and Flip Loan

Here are some of our favorite fix and flip financing tips.

» Work with a Reliable, Local Lender

A local lender understands your area’s real estate trends and may have a network of reliable contractors. That is not all. Look for a lender with a proven history of financing successful flips in the area. Online reviews can offer an insight into what to expect from a potential financial partner.

» Know the Requirements

Hard money loan requirements vary from one lender to another. So, ensure you are conversant with what your choice of lender requires before signing up with them.

» Identify the Costs

Get your budget right by listing all the potential costs of your house flipping project on paper. The expenses include:

  • House purchase cost
  • Upgrades and renovations
  • The property’s carrying costs (think homeowner’s insurance, repairs, property tax, and utility expenses)
  • Marketing costs
  • Project cushion (about 15-20% of your rehab budget to cover unexpected issues)

» Ask about Construction Draws

Construction draws are progressive payments made to a flipper to finance specific construction milestones. Lenders release the funds before the work begins or after completion. So, ask how quickly your financial partner will avail construction funds.

» Draft the Project Schedule

Create a comprehensive schedule for your fix and flip project. It should detail all the renovation works, the timelines for each milestone (stage), and estimate each stage’s cost.

How to Apply for a Loan

Wondering how to apply for fix and flip loans in California? Below are the typical steps:

1. Document Submission

Lenders require borrowers to accompany filled applications forms with a variety of documents, including:

  • Government-issued ID
  • Bank statements
  • LLC operating agreement (if you are investing through a limited liability company)
  • A signed sales contract of the property
  • Personal tax returns
  • Itemized renovation budget

2. Appraisal

Once you submit the required documents, the hard money lender will order an appraisal on the house in question to determine its current and post-rehabilitation value. The lender uses the appraisal report to determine the risk metrics and your loan amount.

3. Closing

The lender checks with the title company to ensure the property has no outstanding liabilities, violations, or liens. The title company must insure the property against future liabilities, including unknown claims. The lender will require you to insure the house against hazards, fire damage, floods (if applicable), etc.

Finally, the lender closes the loan by placing a lien on the property and filing UCC (Uniform Commercial Code) lien. UCC lien allows the lender to recover the remaining loan amount in case you default on payments.

Get Started with Your Fix and Flip Loan with RTI Bridge Loans!

As a reputed Hard Money Lender experts at RTI Bridge Loans understand that each fix and flip project is unique – and every investor deserves a loan tailored to their financial needs. We offer fast-approved fix and flip loans in California, enabling investors to start and complete house flipping projects without the stringent requirements and lengthy processes of typical bank loans.

With 15 years of experience in hard money lending, we close loans in as few as 3-10 days and finance between 70-80% LTV (loan-to-value ratio) of commercial, residential, or hybrid real estate projects. Give us a call at (562) 857-2285 and learn how our hard money loan options can get you started with your next fix and flip project!